RESULT & PERFORMANCE
On behalf of the Board of Directors, I am pleased to present the Annual Report of Nestlé (Malaysia) Berhad for the financial year ended 31 December 2007.

While the year under review was peppered with uncertainty and change, it is comforting to see that the strategic direction of the Group was able to deliver on its objectives. I am pleased to say that for the 2007 financial year, we achieved a turnover of RM3.4 billion; representing a 4.3% increase from the previous financial period.

The year under review has clearly been one of renewal and innovation. We implemented the divestiture of the canned liquid milks, launched several new and appealing products based on our strong R&D network, optimised our working capital and cash flow management, invested in more capacity in our factories and leveraged further on our Halal expertise in both Malaysia and many of our export markets. I am pleased to report that our exports have grown more than 40% over the previous year.

This is underpinned by our commitment to responsible growth, based on our Halal, convenient, innovative and high quality products; while meeting the expectations of our shareholders. The results are impressive seeing that the business climate in which they were delivered has become increasingly complex and more testing. High prices across a range of commodities, penalising the whole food and beverage industry, have affected us in a manner not seen in the past two or three decades. What we have done, to a large extent, is control internally how we respond to this sharp and simultaneous price increases to further enhance our value.

The unprecedented upsurge in the prices of major raw materials (mainly milk solids, palm oil, coffee beans and wheat flour) has affected the Group’s ability to maintain the gross profit margin. The price of milk solids has more than doubled from the 2006 average, while prices for palm oil were about 50% higher and about 20% higher for coffee beans. Compared with last year, however, the gross profit margin dropped by 80bps, partly offset by the right timing of the divestiture of the Canned Liquid Milk business in the early part of the year.

The profit margin before tax increased to 11.6%, improving by 50bps over 2006, thanks to the Group’s continuous drive for Operational Excellence coupled with a vast programme of internal savings across the entire value chain. Initiatives included optimising promotional expenses, marketing and other general expenses in order to mitigate the gross profit margin erosion due to higher input costs.

Many innovative, convenient, affordable and nutritious new products were introduced during the period under review, such as our NESCAFÉ BODY PARTNER range of coffee mixes which offers great taste and quality to consumers. Another recent innovation was the MAGGI TASTYLITE “air dried” instant noodles, offering a reduction of 60% to 80% of the fat content when compared to the “fried” instant noodle. Substantial investments were made in capital and human resources at the Batu Tiga factory to bring this nutritious innovation to the local as well as Australian and New Zealand markets.

In the Growing Up Milks category, meanwhile, we were the first company to launch - under the NESPRAY brand - a product that provides greater immunity through a new and Halal formula containing DHA, SA, ARA fortified with our proprietary Lactobacillus PROTECTUS “ACTIVEPROTECTION” PREBIO3.

While our brands have performed well, we are also conscious that we cannot afford to have a myopic concentration on the short term. Our strength lies in the way we have balanced optimising current market conditions with delivering new products that meet or exceed the demands of consumers who are increasingly looking for products which are nutritious, healthy and convenient. This bodes well for the Group as we continue on our wellness journey. We will continue on our path to grow profitably, through innovation and renovation, brand building, consumer communication, efficient operations and distribution penetration.

The Nestlé brands have, over the decades, become an essential part of Malaysian households and we have achieved this by building trust and offering Halal products of quality, nutritional value with great taste; which comes from understanding and responding to our consumers.

This has been, and will continue to be, our competitive advantage and we will continue to fortify our core base. We will also continue to grow through new business opportunities, while focusing on protecting and gaining market shares of key brands such as MILO, NESCAFÉ, MAGGI, NESPRAY, NESVITA and BLISS through more convenient offerings, better consumer understanding and communication as well as improved distribution and promotional activities. We will strive to keep our product messages clear, our packaging more nutritionally informative and simple to read and keep our brands at the top of consumers’ minds.

As part of the world’s leading food company, Nestlé S.A., with the largest private nutrition research facility based in Switzerland, and a RM6 billion investment annually on R&D, we have an advantage over the competition in providing superior products which offer consumers great taste with nutritional and health benefits at an affordable price.

The exports sector will also continue to be one of the drivers of growth as it contributes toward boosting volume and economies of scale, and Nestlé Malaysia is currently the highest exporter among other Nestlé markets in the region. In 2006, 16% of the turnover was derived from exports and in 2007 this stood at 22%. We will step up efforts to drive exports of our Halal products to new markets such as Western Europe and will contribute further to the development of the local Halal food industry visà-vis the Government’s vision of turning Malaysia into a Halal hub.

As a leading food manufacturer in Malaysia, Nestlé shares its knowledge and experience through the Nestlé “SME Food Industry Mentoring Programme” with local small and medium enterprises to help them tap the global Halal market, while working closely with the Halal Industry Development Corporation (HDC) and the newly-established International Halal Integrity Alliance. In recognition of its contribution, Nestlé Malaysia was awarded at the inaugural Halal Journal Award for “Best Corporate Social Responsibility Project” in 2007 at the World Halal Forum. Nestlé Malaysia is also among the 32 Malaysian public-listed companies as part of the internationally recognised Dow Jones-RHB Islamic Malaysia Index; testament to the compliance of our business practices with Islamic investment guidelines.

Nestlé Malaysia, led by its Finance division, recently partnered with American Express and Maybank for a newly-created ‘Distribution Card Programme’ to outsource collection and payment processes to the experts, enabling us to focus on our core strengths in sales and distribution while reducing our receivables level.

To further leverage on the GLOBE platform through shared services for transactions, the Group also began its preparation for a transfer of Financial and Employee services to the newly-created “Nestlé Business Services-AOA”, based in the Philippines, which will be fully implemented by mid-2008.

Equally important is the work we do for society. I am pleased to report that our first stand-alone report on our Corporate Responsibility commitment last year received good response and we have already published a second report which outlines our work in education, community development, the environment, global partnerships as well as employee engagement.

Our efforts to engage our stakeholders more effectively and gather their understanding and expectations of our long term Corporate Responsibility concept of “Shared Value Creation” culminated in a one-day dialogue session by senior representatives from local and international NGOs - one of three similar dialogues commissioned by Nestlé S.A. and conducted by a UK-based independent third party consultancy, AccountAbility, which also took place in Washington (USA) and Geneva (Switzerland).

DIVIDENDS
In view of our sustained strong performance in 2007, the Board of Directors has recommended a final net dividend of 78.81 sen per share, giving a total net dividend proposed and declared for the financial year of 113.81 sen per share; a 13.8% increase from 2006 and the highest ever in the Group’s history.

PROSPECTS
2008 will continue to be a very challenging year as the high prices of commodities remain a concern. Palm oil and wheat flour have now more than doubled from early 2007, whilst coffee beans and cocoa are anticipated to remain at high and unprecedented levels for quite a while; although milk prices are only expected to soften slightly in the second half of the year. The Group will keep pursuing its initiatives to further optimise its operations and mitigate as much as possible the impact of higher input costs. The Group will also constantly strive for higher sales and continue to protect and grow market share from its competitors. Major investments based upon our strong Halal R&D capabilities have been planned in 2008 to introduce new products as well as to increase the capacity to meet the rising demand in the country as well as for the export markets. Innovation and Renovation will remain key to offering consumers new, exciting, convenient, affordable and nutritious products. The Group will strive to ensure that its on-going yearly profitability level will be protected moving forward. As already highlighted, 2008 will be marked by more volatile quarterly readings than in previous years.

On behalf of the Board, I would also like to express my deepest appreciation to the management and staff for their dedication, commitment and untiring contributions and to our distributors and customers for their continued support and loyalty to the brands and to the Company. I also wish to put on record my sincere gratitude to my fellow Directors for their counsel and support.